Sinopec's Global Reach

Includes: CVX, SHI
by: DayOnBay

By Jules Koifman

The Chinese oil giant Sinopec has recently made numerous large acquisitions overseas.

On Friday, December 3, Sinopec (NYSE:SHI) signed an agreement with Chevron (NYSE:CVX) to buy an 18% stake of its Indonesian deepwater gas fields for $680 million. This deal is one of many in a pattern of the Chinese petrochemical giant’s strategy to enter the deepwater oil and natural gas production business. Sinopec, officially China Petroleum & Chemical Corporation, is one of China’s largest petroleum companies. In 2007, Sinopec was ranked first in the Top 500 Enterprises of China, and in 2010, it was ranked 7th in the Fortune Global 500. If globalization is considered the most important business issue of today, Sinopec’s recent global M&A activity serves as a strong sign of the times.

Sinopec, a subsidiary of the state-owned China Petrochemical Corporation, often referred to as Sinopec Group, is China’s largest supplier of oil products such as gasoline, jet fuel and diesel. The company engages in worldwide exploration for oil and gas and its subsequent extraction and refining. Sinopec’s size is impressive. It produces over 350 million barrels of oil annually and has reserves totaling nearly 4 billion barrels. Sinopec is involved in projects in 20 different countries around the world. Sinopec is 76% owned by the government of China through Sinopec Group, 5% owned by domestic Chinese shareholders and 19% by foreign shareholders through the NYSE and LSE.

On December 2, just one day before the Chevron agreement, Sinopec signed a deal with Petroleos de Venezuela SA (PDVSA) to create a joint venture to extract crude oil in the Orinoco Belt, an area with large deposits of heavy crude. According to Venezuela’s Oil Minister, the deal forms part of a $40 billion Sinopec-PDVSA investment project that will continue through 2016.

On October 1, Sinopec made a $7.1 billion investment in Brazil to acquire a 40% ownership stake in Repsol Brazil, the Spanish oil company’s Brazilian subsidiary. The deal, which created one of Latin America’s largest energy companies, valued at almost $18 billion, involved a substantial share issuance to which Sinopec fully subscribed. In November, Sinopec made an agreement with Kuwait Petroleum Corporation to jointly develop oil projects with an investment of $9 billion.

China is the world’s second largest oil consumer (the first is the US). Since 2006, it has been the world’s largest net importer of oil as economic growth has resulted in a strong demand for energy. China’s GDP grew at 8.7% in real terms in 2009 and averaged 10% real growth per year between 2000 and 2008. Along with this economic growth, family incomes have risen and populations have urbanized. This means more and more Chinese families are buying cars, traveling, and consuming more energy at home. With world oil supply shrinking, China’s growing thirst for oil has contributed a large portion of its recent dramatic rise in price. Despite China’s vast coal reserves, it cannot be completely reliant on coal to power the country due to the massive pollution problems it faces. Since the Chinese government does not want to be reliant on purchasing oil on the open market and hence be at risk of massive price volatility, it has been engaging in project development in countries that have oil but lack the technology or funding necessary to explore and extract it. China therefore often participates in the funding of overseas infrastructure projects such as roads, highways, hospitals and schools in exchange for oil exploration and extraction rights.

Sinopec’s recent acquisitions reflect China’s efforts to explore for oil in developing countries overseas. This story is reminiscent of an England searching for resources in India. Better yet, it is reminiscent of an America exploring for resources and exploiting cheap labor in China. The balance of worldwide economic power is shifting and it is very clear that China’s overseas oil investments put it in a strong position. We should not get accustomed to the idea that Canada-China FDI is a one-way street. In 2008, Sinopec purchased a 50% stake in Alberta’s Northern Lights project and in April of this year spent $4.6 billion to acquire a 9% stake in Syncrude Canada, a major oil sands project. China is beginning to develop the world that developed it.

Disclosure: No positions

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